Intuit Inc. (INTU) Earnings Call Transcript & Summary

Good afternoon, and good morning. This is Keith Weiss from Morgan Stanley Equity Research. I run the software group here. And we're coming at you from day 2 of the Morgan Stanley TMT Conference, virtual edition. This is a special audio edition with CFO Michelle Clatterbuck from Intuit. Michelle, thank you so much for joining us at the TMT conference this year.

Yes. Thank you, Keith. I really appreciate you for having me here.

Excellent. Before we get started, I do have to read a brief disclosure. For important disclosures, please look to the Morgan Stanley website at www.morganstanley.com/researchdisclosures. There is an opportunity for investors to ask questions on this call. You could type it in, and it's going to pop up on my screen. I'll be monitoring those, and I'll try to sort of fit those into our conversations.

So with that out of the way, again, thank you for coming back to our TMT conference. We had you here last year. And definitely, a lot has occurred over the past year. But Q2 results I think were sort of a good turning point, if you will, in terms of the Intuit story, in that it seems like we're heading back in the right direction. Particularly if you look at small business growth, I think you guys did about 11% growth last quarter, which was well ahead of your expectations and the Street expectations. It sounds like we had a really strong first quarter out of the gate with Credit Karma. Tax season is starting to shape up pretty nicely. So in my opinion, overall, pretty bullish call from your guys' perspective. Can you walk us through some of the key developments of what's happening in the Intuit story, what you guys saw in Q2? And how those trend lines are likely to kind of go into the back half of your fiscal year and the first half of calendar year '21?

Yes. Thanks, Keith. We felt really good about our results in Q2, with small business outperforming our expectations and Credit Karma having a strong first quarter since we completed the transaction in December. And in small business, we really like what we're seeing with the trends on the platform with most of the QuickBooks indicators either back to or better than the pre-pandemic levels. This includes things like growth in customer acquisition, the number of companies running payroll and payments, charge volume. We're innovating for our customers during a time when they really need us the most. And we're seeing strong progress with newer products like our QBO Advanced, QuickBooks Live, QuickBooks Cash, QuickBooks Commerce. So small business feels really good. And in fact, we're just getting started this season. We're confident in our strategy and the momentum of extending our lead in the DIY segment and transforming the assisted segment. In the do-it-yourself segment, we've been focused on under-penetrated segments like Latinx, self-employed and investors. And we've launched our TurboTax Live Full Service offerings to really be able to provide customers with additional confidence as we pursue the 86 million assisted filer opportunities. And then lastly, I would say, Credit Karma performed very well this quarter. We're still learning the business, and we see opportunities from credit cards and personal loans in the core to products such as auto and home loans and insurance in the growth vertical and money innovation with savings and checking accounts with Credit Karma Money in emerging verticals. And also as we make personalized financial offers to customers across the platform, Credit Karma does provide us an additional monetization engine for Intuit overall. So, so far, liking what we see, and we felt really good about the quarter.

Outstanding. Excellent. At the earnings call, Sasan said something that we found pretty interesting that returning to the long-term growth targets for the small business segment -- and I believe you guys have talked about the QBO ecosystem getting back to, and correct me if I'm wrong, like a 30%-plus type growth rate. He said it isn't heavily relied upon that the economy bounces back and that fiscal stimulus is not the anchor for us to get back to the growth rates that we believe we can get to. And I think this runs contrary to a lot of investors just thinking about small businesses as a macro formula, that if small business new formation bounces back and the macro is doing better, small business will do better. Can you talk to us about what Sasan was trying to get to with that comment?

Yes. Well, the macro uncertainty, obviously, that continues. We remain confident in how our business is performing in the current environment. When we speak about the strength and recovery that we're seeing in our business, that's really more of a comment that customers are finding value in QuickBooks regardless of the weaker macro environment. And therefore, it comes down to our ability to execute and to be able to innovate for them during a pretty challenging time. Small businesses are struggling. And the economy does need a fiscal stimulus, and we need to see people get back into jobs. And as Sasan shared, 25% of our customers' bank account balances are still down 50% year-over-year. Our payroll customers are paying fewer employees than they did pre-COVID, but the trends are going in the right direction for our customers and for us. And we don't believe the current state of the economy prevents us from getting back to our pre-pandemic growth rate. It will just take some time for these indicators to translate to the full extent into revenue. For example, new customers monetize at a lower level initially. And their ARPC ramps up over the first 12 months as they come off those discounts and if they purchase additional services. And so while we see recovery in customer acquisition, it will take time to get them to the same level of monetization as the customers we lost last year at the beginning of the pandemic.

Got it. Got it. That's super helpful in understanding that transmission mechanism from the positive forward indicators and then when that actually is going to kind of show up on the income statement. There is some time lags, given the discounts, given these new businesses just have to ramp up themselves, right?

Yes.

Got it. Excellent. So I wanted to dig into the tax business a little bit. This is the time of the year where a lot of the focus turns towards tax. And you guys have had a string of really nice tax results sustaining durably, sort of 10%-plus growth over the past couple of years. And it seems like every year is a little bit different formula, right? 2018 was a little bit more price-driven. 2019 was a little bit more unit-driven. 2020 was all about sort of the DIY share gains. And I have this picture in my head of you guys out there with this control panel with all these levers that you can pull and push to really sort of manage the tax season to your intended target. You guys got there -- you guys put out a 9% to 10% growth target for 2021. Can you give us any kind of ideas of the formula or sort of the levers that you're looking to really pull or push this tax season to hit that target?

Well, as you know, our long-term revenue growth expectations for the tax business are 8% to 12% per year. And we've been able to deliver at the high end of the range for several years now. And as you said, each year is a little bit different, with strong growth in total returns and strong DIY share gains and driving a big piece of our success last year. On our earnings call, we reiterated our guidance for Consumer Group revenue growth of, as you mentioned, 9% to 10% for the season. Our expectation this season is for returns at the IRS level to be more flattish following the strong growth last season. And as this category champion, we take responsibility for growing the do-it-yourself category and believe that we're in a good position to do that again this season. We're focused on growing our share of total returns this season as we look across the opportunities in both our core DIY products and our TurboTax Live platform, which now includes the Full Service product that we launched this year. As for ARPC, we see opportunity again this season as we expect continued momentum with TurboTax Live. We raised our long-term revenue growth expectations from 5% to 10% to 8% to 12% a few years ago when we introduced TurboTax Live. And that highlights the ARPC lift we expect to see from that offering over time.

Got it. Got it. That's super helpful. So can we talk a little bit about the TurboTax Live Full Service? That's a new solution you guys are rolling out this year. Where you're going to step further, it's not just video assistance, it's not helping somebody prepare their taxes in where the tax filer is going to be signing on the dotted line. This is a full service offering of where the tax preparer is going to be doing the taxes for your customer, for the end customer, the tax preparer is going to be filing. And you guys are actually going to be bolstering the assisted category a little bit if this takes off, if I'm not mistaken. So can you talk with us about sort of the rationale for Full Service? And how should we be thinking about the potential ramp in Full Service? You guys tend to have measured sort of ramps for new services. Should we keep that in mind and not let expectations get too out of hand when we think about Full Service in the 2021 tax season?

Yes. We see a really exciting opportunity ahead to transform the assisted category. There are still 86 million filers who use some form of assistance to file. And we believe we can help them file with confidence and get the maximum refund they deserve using our digital solutions. We spent a lot of time developing our Full Service offering. We're excited to launch it this season as we know that there are some customers that just will not ever do their own taxes, no matter how good the offering is. So we see a real opportunity to serve these customers effectively at a disruptive price point with TurboTax Live Full Service. As I said, first year, so it's clearly a learning year since we're introducing it for the first time, but it is available to all customers. We're increasingly looking at our tax platform as one that offers customers an expanding set of products that serve a wider set of customer needs. With our increased breadth of products, including Full Service, we feel great about our ability to continue to offer customers exactly what they're looking for each and every year. And we're excited to see the impact that TurboTax Live is having on retention, which we've seen increase by 2 points for each of the last 3 years. We're also seeing evidence that the product is bringing new customers in. Last year, almost 70% of new TurboTax customers who used the Live offering came from an assisted method in the prior year, and that's a higher percentage than we see in TurboTax Online. And so as we scaled TurboTax Live last year, we grew experts at a slower pace than customers. And that's kind of what we're expecting as we go forward. So we're really excited about the overall TurboTax Live experience and opportunity and now with the Full Service offering also.

Got it. Got it. Got it. All right. So one of the things that you talked about as a focal area for the tax business was individual investors. And then 2020 was definitely a really stellar year for new brokerage accounts in the U.S. And estimates that we've seen have a range between 8 million to 10 million new retail brokerage accounts were created in the course of 2020. It seems to us that you guys had remarkably good timing on sort of that focus on individual investors. Should that be a -- could that be a nice tailwind for you guys heading into the 2021 tax season?

Yes. We feel more confident than ever in our ability to serve customers with investments. It's something that we've been focused on over the last few years. We've seen this opportunity coming for some time as millennial investors, they have money and they're looking to invest it. And so last year, in our TurboTax Premier offering, we added more partners to better facilitate data import, while also making it easier for investors to bring in those higher volumes of transactions and bring those into the product. We delivered expanded auto import capabilities, which allows customers to import more than 1,500 transactions at once and upload over 2,000 cryptocurrency transactions, all-in service to providing that best experience for customers. And this has been a focus of ours for -- and not just this year but for the last couple of years as one of our under-penetrated segments. And so if these customers are also -- if they're looking for expert help, our Live platform is well-positioned to assist with that as well. We know that millennial investors are increasingly open to digital solutions. So we feel well positioned to serve these customers. So we're very -- we're feeling really good about the products that we have out there and our opportunity to serve the customer set well.

Excellent. Excellent. So last question I want to ask on the tax side of the equation, then we can expand the conversation, is just the Free File mix. And this is a topic that investors have been focusing on for a while, both in terms of kind of the Free File Alliance, and there's some noise around that last year. But I think the more sort of durable part of the equation is just a shift towards more free filers. And I think last year, you saw Free File units accelerate like 23% year-on-year growth. And it's about 35% of the TurboTax mix today. Any thoughts on, one, kind of does that pace of Free File mix continue to grow higher? On a go-forward basis, how much more room is there for Free File to sort of take share in the overall mix? And two, what's the strategy to sort of create alternative monetization avenues for some of these free customers? And is that where Credit Karma really comes into the equation?

Yes. For us, serving free tax customers remains an important strategic priority for us. And we believe last season benefited somewhat from stimulus filings also. This season, we expanded our pre-eligibility to better serve customers receiving unemployment benefits. And we're also offering TurboTax Live basic, for free, for a limited time to customers with simple returns. We remain committed to offering free tax prep for those who need it most with a good robust free offering. We've been one of the industry leaders in driving an enhanced free commercial product for a number of years now. Our strategy is to extend our lead in the do-it-yourself market, in transforming the assistant category and disrupting consumer finance with Credit Karma. The growth in free is key to our strategy of bringing in more customers to the platform, especially as we move towards solving a broader set of consumer problems. And yes, with Credit Karma, that gives us another opportunity of being able to monetize customers in a different way. Now that being said, there were tailwinds in FY '19 and FY '20 that resulted in, as you mentioned, the 20-plus percent growth in free that we don't expect to recur each year. For example, back in FY '19, we expanded free eligibility by making our year-over-year data transfer free. And we also made our Absolute Zero promotion a year-round price rather than the promo that it had been for the few years before that. And then last year in FY '20, we had significant tailwinds, which included expanding our military pre-eligibility plus the halo effect of the pandemic that less likely that drove people to free offerings.

Got it. Got it. So segueing into Credit Karma, I think, is a good segue. Could you talk to us about what connections have been made already between the TurboTax franchise and the Credit Karma franchise? You talked on last earnings call about 26 million consumers that have consented to enabling you guys to utilize their data going into the Credit Karma platform. That seems like a good set of data for Credit Karma to work off of, considering you have verifiable income. So is that one part of sort of the connections? And where else have you started to make the connections between the 2 consumer franchises?

Yes. It's -- we're really excited about Credit Karma overall. As you mentioned with -- one of the things we've done is, with customer consent of course, we combined the 26 million TurboTax returns with Credit Karma. And that really creates a complete financial profile for both existing and prospective members. So we think that will be really helpful for consumers. We've also launched Credit Karma Money at the end of the TurboTax experience. And so as consumers go through and complete their TurboTax returns, they have an opportunity to take that $88 billion in refunds that they get and be able to put that into a no fee checking or savings account. And we're launching TurboTax as part of the Credit Karma platform. We know that some -- a higher percentage of the Credit Karma members have used an assisted method to file their taxes in the past. And so having access to the Live platform, we view it as a great opportunity to really help them solve a number of the competence issues they may have with filing their taxes. So we see a very large opportunity here, longer term. Obviously, this is the very first season with us together working. And so we're doing a lot of testing and experimenting now, but really focus on how we can drive that greater opportunity over the longer term.

Got it. Perfect. So if we dig into the Credit Karma results in the most recent quarters, first quarter out of the gate, you had them combined with Intuit for about 2 months out of the quarter. But looking at the pro forma disclosures that you guys gave in your SEC filing, it looks like while Credit Karma had a difficult year in calendar '20, their business was down on a year-on-year basis, that, that decline got a lot better in Q2 versus Q1. It was down about 33% in Q1, down about 18% in Q2. Could you talk to us a little bit about the trajectory that you're seeing in Credit Karma right now? And what are some of the core growth drivers in that business that we should be thinking about as we head into calendar '21?

Yes. We're actually seeing the business bounce back more quickly from the pandemic than we had expected. And that was reflected in our Q2 revenue. So we're still not all the way back to pre-COVID revenue levels, that's definitely for sure. So in our core verticals, we're seeing new credit card and personal loan partners who are onboarding, while the overall partner activity is continuing to recover. And then in the growth verticals, there was strong growth, was really driven by several products, mainly auto insurance, and that was followed by home loans and then auto loans. And mortgages have grown strongly in the current low rate environment and still have a lot of runway for growth, given the size -- just the overall size of the opportunity. January revenue in the growth vertical was up over 1.5x year-over-year, and that achieved a high watermark. So that definitely gives us confidence there. In the emerging vertical, it's still very early, but we're excited about the opportunities ahead for money innovation as we roll out, as I mentioned, Credit Karma Money. We integrated that into the TurboTax filing experience, as I just mentioned. And so it's a great opportunity for consumers to get that no fee debit and checking account. And it's a key opportunity to really be able to grow member engagement and to achieve our longer-term ambition to help members optimize their finances with technology. So yes, Q2 revenue was bouncing back more quickly than we had anticipated, and that definitely gives us confidence looking forward.

Got it. I was talking to our banking analyst, Betsy Graseck, and she was talking about how sort of loan volumes versus deposits are at multiyear lows right now. They tend to trend between 70%, 80%. Right now, we're down at 50%. So there's a lot of money on the banks' balance sheets that they want to lend out. Am I wrong in thinking that, that could be a really nice opportunity for Credit Karma? Because that's basically the value proposition for those financial service partners to help them get sort of the credit that they want to go against those deposits.

Yes, it is. The financial partners have really seen Credit Karma is a great way to get access to consumers. Especially if they get on the platform, they utilize the Lightbox technology. It enables them to be able to more easily target the exact customers that they're looking for. And they are able to have a better outcome. The consumer is able to then be able to have much more confidence that when they're preapproved, that they actually are going to be able to get the credit card, the personal loan, whatever that may be. And so it actually works out for everyone. And so yes, we do expect that the financial institutions will continue to come back to Credit Karma and really find this, as they did before, a great way to get access to customers.

Got it. Got it. So we have about 5 minutes left. And I want to make sure that we touch on the small business side of the equation, because there's a ton of interesting stuff going on right now. And I think one of the most significant developments from my perspective is a shift a little bit in the growth equation in small business that more evenly weights sort of growth in ARPC, from our perspective, as you guys go after higher value solutions, going after stuff like QuickBooks Advanced, QuickBooks Live, a value-add solution there. You've enlarged the amount to sort of add-on solutions beyond payroll and payments. Now we have Commerce and we have Capital, all of which could potentially service a higher revenue per customer over time. And we saw it in some of your numbers that you presented at Analyst Day. I think new subscribers with over $1,000 ARPCs were up 36% on a year-on-year basis. So can you talk to us about what some of those core drivers are in revenue per customer? Which ones are you most focused on near term? What are sort of the longer-term opportunities? And then maybe sort of wrapping the margin side of the equation, does that sort of higher value solution help your stated goal of driving margins higher for the overall company?

Yes. So you've got a lot of questions in there.

Yes, I'm sorry. It's just like I have 5 minutes left. I'm going to ask you 5 questions all wrapped up in 1 mega question.

That's okay. That's okay, that was great. That was -- you're right. We are very excited about a lot of things that are going on in small business right now. We've been talking about how do we grow small business. We've given some updates on how to think about the growth algorithm for us, and it's really around customers growing 10% to 20%, ARPC growing 10% to 20%. That really gets to our 30-plus online ecosystem revenue growth for the longer term. So that's very exciting for us. The items that are really contributing to results today in a meaningful way are our payments and payroll services and QBO Advanced. Our customers' biggest problem is managing their cash flow. And so innovation in things like payment-enabled invoices and QB Cash are real differentiators for the customers that we serve. And we shared that QBO Advanced customers have doubled last year, so 75,000, as we continue to really build out the offering and innovate to better serve small businesses -- small business, mid-market customers. Some of the other things, QB Live, QB Commerce, they're in their early days. We do expect them to be important growth drivers going forward. We've doubled QB Live customers over the last year, and we've seen retention rates improving. So we're very excited about that. As I mentioned, QB Commerce, we just launched that back in September. So we're just getting started there. We see a real opportunity to better serve the 1 million product-based businesses that are on our platform, but there's also 6.4 million customers in our core markets. So we're very excited about that opportunity also. So we have more levers than ever to really drive long-term revenue growth. And we're really focused on just innovating for our customers right now. It's a very difficult time for them, and we're seeing some really encouraging signs with these innovations. As you talked about, you mentioned margin. I'll just mention that real quick because I know we're about out of time. For us, it really is just continuing to allocate our resources to those areas that are going to see the most accelerated growth. And so all of the things I just mentioned are great opportunities across longer term. We really manage our margins at the company level. And so as we're becoming more of a platform, it's giving us a great opportunity to be able to take advantage of that and drive some leverage with our margins and be able to continue to accelerate growth across the company.

Got it. And if I can maybe sneak just one last one in about that sort of broader kind of ecosystem of solutions, both the ones that you have, but also sort of your partners bring to the equation. I would argue that the small business software market has gotten a lot more competitive over the last 3 to 5 years. Solutions have gotten a lot better. The small businesses understand how to use online services a lot better. And they're just, frankly, easier to use. So it's easier to bring into their day-to-day kind of work processes. How does -- like -- so now when you're trying to get that QBO customer to adopt payroll, they're hearing payroll offers from guys like Paylocity and a ton of other small vendors out there. When you're trying to get them to attach payment, you have Square coming at them with payment or Shopify coming out with the payment. Their banks are coming at them with payment options. How does Intuit look to differentiate that broader offering, that broader ecosystem for the QBO customers and make QBO sort of the center of gravity that these small businesses want to consolidate all these functionalities around?

I would say, we're still really focused on just solving customers' biggest problems. Yes, there's many other companies that are doing the same. So naturally, we're all going to overlap. And we have an open-ecosystem strategy and have both partnered and competed with peers, whether it's in payments or payroll. And this has existed for a number of years. But we believe we're positioned to best serve our customers with our own organic offerings in things like payroll and payments. We're going to continue to partner with people, whether it's for bill pay capabilities like Melio, which provides a solution for our smaller customers in QBO, or Bill.com that provides a solution for larger customers in QBO Advanced. We'll see where those attach rates go over time. We just think there's a lot of opportunity, and we have the -- a great advantage with those customers being on our ecosystem. But we will continue to partner with others so that our small business customers have the opportunity to get those solutions that work best for them. But it is dependent upon us to make sure that we are providing the best solution possible for that -- to solve their needs.

Outstanding. Unfortunately, that takes us a little beyond our allotted 30-minute time slot. But Michelle, thank you so much for joining us. As always, a really fascinating conversation. And a ton going on at Intuit, so definitely something that we'll be keeping an eye on and talking a lot about over the course of 2021. And I'm looking forward to continuing the conversation going forward.

Great. Thank you so much, Keith. Really appreciate you having me.

Excellent. We'll talk soon.

Thank you.